in this topic we are going to learn managerial economics where we explore how businesses make informed decisions in a constantly changing economic landscape
8. Economics
Economics: ‘A Queen of Social
Sciences’
Economics ‘OIKOS’ ‘NOMOS’ (Greek Words)
‘OIKOS’ ‘HOUSE’
‘NOMOS’ ‘MANAGEMENT’
According to J.S. Mill Economics is “The practical science of
production and distribution of wealth.”
‘It is the study of How people produce and
spend income.’
9. Economics
It talks about ‘Economic Activity’
and ‘Economic Problem’.
‘It is the Study of Logic choice between Scarce
resources and unlimited wants’
‘Economics is to get the answer to the basic questions
of an economy such as, What to produce?, How to
produce? And for whom to produce?’
‘Economics is the social science that is concerned with
the production, distribution, and consumption of
goods and services.’
10. Economics
Those activities of mankind are studied which are concerned with earnings
and spending of money.
For the successful handling of these activities certain laws and rules are
formulated which are known as various theories of economics.
Use of these rules & tools provided for analysing business conditions and
applying them for arriving at various economic decision is known as
managerial economics.
11.
12.
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18.
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20.
21.
22.
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24.
25.
26.
27. Meaning & Definition of Managerial Economics
According to Spencer and Siegelman, “ Managerial Economics may be
defined as the integration of economic theory with business practice for the
purpose of facilitating decision making and forward planning by
management.”
Decision Making: Means selecting one out of a set of two or more alternatives
or in other words, making a choice.
Planning: Means planning for the business activities to be undertaken for
future.
( The problem of selection arises because the supply of factors of production
(land, labour, capital and enterprise) is scarce or limited.)
Managerial Economics helps management in making right decisions and
planning for the future under the condition of uncertainty.
28. Other Definitions of Managerial Economics
According to McNair and Meriam, “ Business Economics consists of
the use of economic modes of thought to analyse business situation.”
According to Joel Dean, “The purpose of managerial economics is to
show how economic analysis can be used in formulating business
policies.”
In the words of Joseph L. Messy, “ Business Economics is the use of
economic theories by the management in making business decisions.
29. After the study of various definitions it can be concluded
that:
Managerial Economics is that branch of knowledge in which theories
of economic analysis are used for solving business management
problems and determination of business policies.
Managerial Economics serves as a bridge between Economics and
Business Management.
30. Managerial Economics
Branch of Economics.
‘Managerial Economics is the study of Economic
Theories, Principles and Concepts which is used in
Managerial Decision Making.’
‘Managerial Economics is the Application of various
Theories, Concepts and Principles of Economics in
the Business Decisions.’
It also Includes ‘The Application of Mathematical and
Statistical tools in Management decisions.’
32. Managerial Economics
Managerial Decisions
Choice of product
Choice of production
method
Choice of price, Etc…
Managerial Economics
‘Application of Economic
Concepts, Theories and
Analytical tools to find
solutions for managerial
problems.
Application of
Economic
concepts,
Theories and
Principles in
decision Making
Application of
Analytical tools
such as,
Mathematical and
Statistical tools
33. Managerial Economics
Economics.
Theories
Principles
Concepts
Decision Making.
Selection of best alternative out of various possible
alternatives.
Risk & Uncertainty
34. Nature of Managerial Economics
Science as well as Art of decision making.
It is essentially Micro in nature but Macro in
analysis.
It is mainly a Normative science but positive in
analysis.
It is concerned with the application of theories
and principles of economics.
It discusses Individual problems.
It is dynamic in nature not a Static.
It discuss the economic behavior of a firm.
It concentrates on optimum utilization of
resources.
35. Scope of Managerial Economics
1) Demand Analysis and Forecasting: Demand analysis and forecasting of
demand facilitates the decision making and forward planning. If demand
forecasting of a firm is correct, the firm earns more profit and if they are
wrong it suffers losses.
2) Production Planning and Management: Every firm is engaged in certain
production, hence it has to plan and manage the production. Firm has to
make profitable decisions keeping its factors of production and the product in
view.
3) Cost Analysis: One of the important responsibilities of business managers is
to analyze and control costs in order to maximize the profit. It can be done
only by the proper investigation and research about the respective costs.
4) Pricing Policies and Practices: Deciding the price is one of the important
subject of business economics. The success of a firm depends upon decisions
regarding prices.
36. Scope of Managerial Economics
5) Profit Management: Managerial economics helps in analysis of profit
measurement and control.
6) Capital Management: Capital management in business economics includes
cost of capital, profitability of the capital and the selection of suitable project
or projects out of various projects.
7) Decision Theory under Uncertainty: Uncertainties are many fold such as
uncertainty of demand, uncertainty of cost, uncertainty of capital etc. Many
statistical methods are developed for taking decision under condition of such
uncertainties.
37. Responsibilities of Managerial Economist
1) To make reasonable profit on capital employed: Economist’s main
obligation is to assist the management in earning reasonable profis on capital
invested by the firm.
2) Successful Forecasting: Economist must aim at lessening if not fully
eliminating the risk involved in uncertainties.
3) Contact with Sources and Specialists of information (in order to collect
quickly the relevant and valuable information in the field.
4) Status in the Firm
38. Managerial economics and
Decision Making
Decision making:
Decision making on internal affairs.
Decision making on external affairs.
Internal affairs talk on internal environment which
consists of internal factors such as, Production,
Financial, Marketing and Human resource related
decisions.
External Affairs talk on external environment which
consists of external factors such as, PEST related
decisions.
39. Decision Making
Uncertainty:
Nothing can be expectable because of the constant
changes in the environment both internally as well as
externally.
Risk:
It is the situation which comes under uncertainty.
41. Economic Models
Economic model
is the structural and scientific method
of constructing or developing
Solutions by using basic economic
principles, concepts, theories and
Quantitative techniques such as
mathematical and statistical tools.
42. Defining the
problem
Formulation of
hypothesis
Data collection
Analysis of data using Basic
Principles of economics and
Quantitative Techniques.
Evaluating
results
Testing of
Hypothesis
Conclusion for
decisions.
43. Firm:- Firm is a business organisation that buys or hires
factors of production in order to produce goods and services
that can be sold at a profit.
Objective of firm:-The standard economic assumption
underlying the analysis of firms is profit maximization. Firms
are assumed to make decisions that will increase profit.
Generally speaking, profit maximization is the process of
obtaining the highest possible level of economic profit
through the production and sales of goods and services. For a
more thorough discussion of this topic, see the profit
maximization entry. Real world firms might pursue other
objectives including: (1) sales maximization, (2) pursuit of
personal welfare, and (3) pursuit of social welfare. In some
cases, these other objectives help a firm pursue profit
maximization. In other cases, they prevent a firm from
maximizing profit.
44. OBJECTIVE OF FIRM
Sales maximisation
Profit maximisation
Utility maximisation
Welfare maximisation
Growth maximisation
Objectives
of firm
45. OBJECTIVE S OF TOP COMPANIES
APPLE
RELIANCE
INDIAN OIL
SAMSUNG
46. To expand their sales to customers who have not yet own any Apple’s
products.
To produce hassle free products that provides service and enjoyment for
customers.
Become the leading business in the mobile market.
RELIANCE LTD.
Create synergetic effect by creating high quality and diversified portfolio.
Provide diversified financial services with focused people.
Diversification of sources of fund.
Enhance Corporate value through sustained growth.
47. To serve the national interests in oil and related sectors in accordance
and consistent with Government policies.
To maximize utilization of the existing facilities for improving efficiency
and increasing productivity.
To earn a reasonable rate of return on investment.
To serve the national interests in oil and related sectors in accordance
and consistent with Government policies.
SAMSUNG COMPANY
To extend amongst members the knowledge and appreciation of
computers, automatic data processing systems and Computer based
automatic control system, and of theory.
To foster an informed public opinion regarding computation and
computing machinery and techniques .
To take interest in the general professional welfare of the members.
To do such other things as the Society may think incidental or conducive
to the attainment of the objects of the Society.
49. Opportunity Cost Principle
Choice involves sacrifice.
The cost involved with the sacrifice
It is the cost of an next best opportunity which is lost
will be called as Opportunity cost.
Ex: 100 Rs can be used for purchasing book or eating in
pizza corner or purchasing of stationeries.
Now the cost of purchasing book is also include the cost
of ‘Eating pizza.’
50. Opportunity Cost
EXAMPLE: an individual has $25 to either
purchase groceries or new clothes. The individual
weighs the choices against each other and decides
that it’s more important to eat for the week and
forgo the new pair of jeans. The opportunity cost
of the groceries is……
51. Equi-marginalism Principle
Allocation of scarce resources on different alternative
uses should be equally distributed.
Equi-marginal Principle implies that a consumer
will distribute his/her income over various goods in a
way that the marginal utility derived from the last unit
of money spent on each good is equal.
52. Incremental Principle
Incremental principle gives an idea to increase the
production not only with one more product it could be
any quantity till the profit exists.
According to this principle profit can be existed either
by increasing sales or total revenue or by decreasing
total cost
53. Discounting Principle
According to this principle, if a decision affects costs
and revenues in long-run, all those costs and revenues
must be discounted to present values before valid
comparison of alternatives is possible. This is essential
because a rupee worth of money at a future date is not
worth a rupee today. Money actually has time value.
Editor's Notes
in this topic we are going to learn managerial economics where we explore how businesses make informed decisions in a constantly changing economic landscape
Economics deals with how the numerous human wants are to be satisfied with limited resources. Thus, the science of economics centres on want - effort - satisfaction.
Adam smith (1723 - 1790), in his book “An Inquiry into Nature and Causes of Wealth of Nations” (1776) defined economics as the science of wealth. He explained how a nation’s wealth is created. He considered that the individual in the society wants to promote only his own gain and in this, he is led by an “invisible hand” to promote the interests of the society though he has no real intention to promote the society’s interests. Criticism: Smith defined economics only in terms of wealth and not in terms of human welfare.
Alfred Marshall (1842 - 1924) wrote a book “Principles of Economics” (1890) in which he defined “Political Economy” or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well being”. The important features of Marshall’s definition are as follows: a) According to Marshall, economics is a study of mankind in the ordinary business of life, i.e., economic aspect of human life. b) Economics studies both individual and social actions aimed at promoting economic welfare of people. c) Marshall makes a distinction between two types of things, viz. material things and immaterial things. Material things are those that can be seen, felt and touched, (E.g.) book, rice etc. Immaterial things are those that cannot be seen, felt and touched. (E.g.) skill in the operation of a thrasher, a tractor etc., cultivation of hybrid cotton variety and so on. In his definition, Marshall considered only the material things that are capable of promoting welfare of people. Criticism: a) Marshall considered only material things. But immaterial things, such as the services of a doctor, a teacher and so on, also promote welfare of the people.
Lionel Robbins published a book “An Essay on the Nature and Significance of Economic Science” in 1932. According to him, “economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. The major features of Robbins’ definition are as follows: a) Ends refer to human wants. Human beings have unlimited number of wants. b) Resources or means, on the other hand, are limited or scarce in supply. There is scarcity of a commodity, if its demand is greater than its supply. In other words, the scarcity of a commodity is to be considered only in relation to its demand. c) The scarce means are capable of having alternative uses. Hence, anyone will choose the resource that will satisfy his particular want. Thus, economics, according to Robbins, is a science of choice. Criticism: a) Robbins does not make any distinction between goods conducive to human welfare and goods that are not conducive to human welfare. In the production of rice and alcoholic drink, scarce resources are used. But the production of rice promotes human welfare while production of alcoholic drinks is not conducive to human welfare. However, Robbins concludes that economics is neutral between ends.
Microeconomics is the social science that studies the implications of incentives and decisions, specifically how those affect the utilization and distribution of resources on an individual level. Microeconomics shows how and why different goods have different values, how individuals and businesses conduct and benefit from efficient production and exchange, and how individuals best coordinate and cooperate with one another. Generally speaking, microeconomics provides a more detailed understanding of individuals, firms, and markets, whereas macroeconomics provides a more aggregate view of economies.
Macroeconomics is a branch of economics that studies the behavior of an overall economy, which encompasses markets, businesses, consumers, and governments. Macroeconomics examines economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.
Some of the key questions addressed by macroeconomics include: What causes unemployment? What causes inflation? What creates or stimulates economic growth? Macroeconomics attempts to measure how well an economy is performing, understand what forces drive it, and project how performance can improve.
Development economics is a branch of economics that focuses on improving fiscal, economic, and social conditions in developing countries. Development economics considers factors such as health, education, working conditions, domestic and international policies, and market conditions with a focus on improving conditions in the world's poorest countries.
What is urban rural and regional economics?
Because economic growth tends to be uneven, rural areas often face major challenges to their development efforts. Urban and regional economics is the study of urban areas or regions based on the consideration of space, transportation cost, and location in production and consumption decisions.
Science is a systematized body of knowledge that traces the relationship between cause and effect. Another attribute of science is that its phenomena should be amenable to measurement. Applying these characteristics, we find that economics is a branch of knowledge where the various facts relevant to it have been systematically collected, classified and analyzed. Economics investigates the possibility of deducing generalizations as regards the economic motives of human beings. The motives of individuals and business firms can be very easily measured in terms of money. Thus, economics is a science
An art is a system of rules for the attainment of a given end. A science teaches us to know; an art teaches us to do. Applying this definition, we find that economics offers us practical guidance in the solution of economic problems. Science and art are complementary to each other and economics is both a science and an art.
a) Positive science: It only describes what it is and normative science prescribes what it ought to be. Positive science does not indicate what is good or what is bad to the society. It will simply provide results of economic analysis of a problem. b) Normative science: It makes distinction between good and bad. It prescribes what should be done to promote human welfare. A positive statement is based on facts. A normative statement involves ethical values.
in today's competitive World understanding the principles of managerial economics is essential for Effective management and sustainable growth.
in every business managers face a number of choices they need to allocate resources wisely determine pricing strategies forecast demand analyze market trends and assess risks this is where managerial economics comes into play a discipline that combines economic theory with practical business knowledge.
this is where managerial economics comes into play a discipline that combines economic theory with practical business knowledge
managerial economics provides a framework for decision making by applying economic Concepts and tools to
real-world business problems by utilizing these principles managers can optimize their decision-making process and improve the overall performance of their organizations
so managerial economics can be defined as the branch of Economics which deals with the application of various Concepts
theories methodologies of Economics to solve practical problems in business management
Profit maximisation is a process business firms undergo to ensure the best output and price levels are achieved in order to maximise its returns. An example would be a scheduled airline flight. The marginal costs of flying one more passenger on the flight are negligible until all the seats are filled. The airline would maximize profit by filling all the seats.
What is the utility maximization philosophy?
It consists of choosing how much of each available good or service to consume, taking into account a constraint on total spending (income), the prices of the goods and their preferences. Utility maximization is an important concept in consumer theory as it shows how consumers decide to allocate their income.
Welfare maximisation refers to the policy which looks after the welfare of the society and its people. Its main focus is to provide opportunities to all people equitably. This ensures that there is fair distribution of goods and services among the rich and the poor.
An alternative to profit maximisation is for a firm to try and increase market share and increase the size of the firm. They can do this by cutting price and increasing sales.
Initially, you might derive more utility from consuming apples, but as you continue to eat more, the satisfaction derived from each additional apple decreases according to the law of diminishing marginal utility.
Incremental principle states that a decision is profitable if revenue increases more than costs; if costs reduce more than revenues; if increase in some revenues is more than decrease in others; and if decrease in some costs is greater than increase in others.
Discounting is the process of converting a value received in a future time period to an equivalent value received immediately. For example, a dollar received 50 years from now may be valued less than a dollar received today—discounting measures this relative value.
Managerial Economics is concerned with the application of economic principles to key management decisions. It provides guidance to increase value creation within an organization and allows for a better understanding of the external business environment in which the organization operates.